DEVELOPMENT OF AGRI-FOOD TRADE COMPOSITION OF THE NEW EU MEMBER STATES

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1 DEVELOPMENT OF AGRI-FOOD TRADE COMPOSITION OF THE NEW EU MEMBER STATES DUSAN DRABIK, LUBICA BARTOVA ABSTRACT In the paper we analyse development of composition of agri-food trade of new EU Member States of the 2004 and 2007 enlargements (NMS) in the period of The main finding of the paper is that there has been a tendency across NMS towards decreasing heterogeneity of export and import shares of commodity groups according to their processing level. NMS have been improving their positions in highly processed products on markets of the Member States of the 2004 EU enlargement. There was no significant shift observed in the processing level of NMS agri-food export to the EU Member States before 2004 (EU-15). Keywords: agri-food trade, level of processing, trade composition, econometric model 1 INTRODUCTION The enlargement process of the EU in 2004 and 2007 invoked changes in the economies of the new Member States (NMS) well before their formal accession to the EU. Changes in trade policies and subsequent new arrangement of trade patterns present such a case. It has been discussed and analysed extensively (e.g. CHEVASSUS-LOZZA, UNGURU 2001; ZAGHINI, 2005; CAETANO, GALEGO 2006). The question that arises is whether the process of NMS accession to the EU was accompanied by narrowing the variability among NMS in terms of composition of their agri-food trade, and if there have been some shifts in this composition. The answer to the posed question is important. A recent paper by DE BENEDICTIS, TAJOLI (2008) documents on a sample of ten Central and Eastern European Countries 1 (CEECs) in the period of that similarity in export composition has a significant positive and non-linear Slovak Agricultural University in Nitra, Faculty of Economics and Management, Slovakia. Dusan.Drabik@fem.uniag.sk Joint Research Centre - Institute for Prospective Technological Studies (JRC - IPTS), European Commission, and Slovak Agricultural University in Nitra, Faculty of Economics and Management, Slovakia. Lubica.Bartova@ec.europa.eu 1 The following countries are included: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

2 2 Contributed Paper presented at IAMO Forum 2008 impact on catching-up process. DRABIK, BARTOVA (2007) show on a subset 2 of the CEEC examined by DE BENEDICTIS, TAJOLI (2008), that majority of the most competitive export articles on the analysed markets are semi-processed and processed products. Global tendencies in trade with agricultural commodities and food products show that the trade in higher-value products has been growing at a faster rate than the trade in bulk agricultural commodities (REGMI ET AL. 2005; ZHUANG ET AL. 2007). However, as, in general, there are significantly higher tariffs on processed products than on primary commodities, and since the WTO negotiations on their lowering have so far not come to their end, the future growth of trade share of higher-value products is not certain. In particular, tariff and non-tariff trade barriers for highly-processed products are significant in most countries and remain among highest in agricultural sector (REGMI ET AL. 2005). Foreign direct investments (FDI) are found to be an important factor of changing composition of agri-food trade of transition countries (GOW, SWINNEN 1998; BANSE ET AL. 2007). They bring know-how that improves quality of produced products which is relevant for NMS especially in the context of exports of high-value products. These, in particular before the EU accession, did not meet strict EU-15 standards. FDI are mostly concentrated in the more highly processed sectors of the food industry such as confectionary, tobacco and beverages, rather than in more resource-intensive activities like milling or meat production (VAN BERKUM 1999). In this paper we analyse a composition of NMS agri-food trade according to the level of processing in the period The paper has two goals. First, to verify if our hypothesis of growing similarity in composition of agri-food trade of NMS is right. Second, on the example of NMS two major trading partners namely EU-15 and new Member States of the 2004 EU enlargement (NMS04), to analyse possible shifts in composition of their agri-food trade. The outline of the rest of the paper is as follows. Second part presents the data and explains and describes the models used. Results are presented and discussed in the third section, while the fourth section summarises and draws conclusions. 2 Bulgaria, the Czech Republic, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

3 Development of Agri-food Trade Composition of the New EU Member States 3 2 MATERIAL AND METHODOLOGY The following NMS trade partners/groupings were selected in our analysis: EU-15, NMS04, Bulgaria and Romania before their accession to the EU (NMS07), Commonwealth of Independent States (CIS), the United States of America (USA) and the rest of the world (ROW). Motivation behind this grouping of the trade partners was following. Agricultural trade with one of the most important trade partner, the EU-15, was significantly liberalised after the year With regard to data availability, NMS04 trade grouping consists: the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. NMS agri-food trade with CIS was examined considering close trade relations in the past. Although NMS agri-food trade with the USA represents a small share of the total trade, it benefited from several bilateral agreements. All other countries were aggregated to the rest of the world grouping (ROW). We use monetary agri-food trade flow data from the TRADEAG CEEC database 3. Data come from the national Statistical offices of the eight countries and cover the period 2000 to We split commodities into four categories by the level of their processing following the trade flow classification used by the United States Department of Agriculture (USDA). The individual categories are: bulk commodities, horticulture/produce, semi-processed products and highly-processed products. To follow the two objectives of this paper, we construct two econometric models. 2.1 Model I First, shares of commodity groups by the level of processing on total value of export or import with a trade grouping are calculated. The heterogeneity across the countries and individual years is then assessed by coefficient of variation. The variability of the countries agri-food trade composition is modelled as a function of (i) time, to account for the trend in the development, and (ii) a respective commodity group. Trade grouping dummies are included in the model to capture the trade grouping specific effects, if any. The model is specified as follows: v k it = c + a 1 t+a 2 H+a 3 S+a 4 P+a 5 EU15+a 6 NMS04+a 7 NMS07+a 8 CIS+a 9 ROW+u it (1) where 3 The TRADEAG CEEC database was constructed under 6th FP project of the EU TRADEAG Agricultural Trade Agreements (Specific Targeted Research Project, contract No )

4 4 Contributed Paper presented at IAMO Forum 2008 i - commodity category, t - year; t=1...6 k trading partner/grouping (EU-15, NMS04, NMS07, CIS, USA, ROW) v it coefficient of variation of shares of a commodity type across the countries related to a trading partner. c constant, a 1...a 9 regression coefficients, H, S, P dummy variable for horticulture/produce, semi-processed, and processed products, respectively. The dummy variable equals to 1 if a respective category is modelled, 0 otherwise, EU-15,...,ROW dummies for trade groupings specified above, u disturbance term. Bulk commodities (B) and the USA (as a trade grouping) are benchmark variables. To tackle the heteroskedasticity problem, which occurs due to the significant variability in the regressant, we transformed the model (1) into the log-lin form (2) and estimated the parameters using ordinary least squares (OLS): ln v k it = c + a 1 t+a 2 H+a 3 S+a 4 P+a 5 EU15+a 6 NMS04+a 7 NMS07+a 8 CIS+a 9 ROW+u it (2) If our hypothesis is right, the parameters values a 1,...,a 9 should be negative. 2.2 Model II We investigate what shifts, related to the level of processing, have occurred in the structure of agri-food trade patterns of the eight countries. In our model, the dependent variable is a country-specific share of export or import of a commodity type in a certain year. The explanatory variables are (i) previous year share we assume there is a time lag in the development of agri-food trade structure. For instance, if the share of bulk commodities was very high in 2000 it is likely that it stayed relatively high also in the next year, despite there has been a long run tendency towards diminishing importance of unprocessed commodities; (ii) a product of commodity type dummy and time. The idea behind the variable is to obtain a variable that takes into account time and commodity type effects at the same time. That is, to answer the question what has gradually happened to the share of a commodity type in the examined period; (iii) we have also included country dummies to take account of the country specific effects. The model takes the form:

5 Development of Agri-food Trade Composition of the New EU Member States 5 Share k i,t = c + a 1 Share k i,t-1 + a 2 B*t + a 3 H*t + a 4 S*t + a 5 P*t + a 6 CZ + a 7 LV + a 8 LT + a 9 BG + a 10 PL + a 11 RO + a 12 SK + u i,t (3) where i commodity type, t time; t=2...6 k respective trade grouping (EU-15 or NMS04) c constant, a 1...a 12 regression coefficients, Share share of value of a commodity type of agri-food export (import) value to (from) a trade grouping, B, H, S, P dummy variable for bulk commodities, horticulture/produce, semi-processed, and processed products, respectively. The dummy variable equals to 1 if a respective commodity type is modelled, 0 otherwise, CZ,..,SK country specific dummies. The dummy equals to 1 if trade of a country is modelled, 0 otherwise u disturbance term. We chose Slovenia (SI) as a reference category and thus there is no dummy for this country. Cross-sectional component of our data brings about the issue of heteroskedasticity. To lower its presence, we monotonically transformed the model (3) into the form (4). Furthermore, to cope fully with the heteroskedasticity problem, ordinary least squares (OLS) was used with White heteroskedasticity-consistent standard errors. + a Share 8 k = k i, t c + a1 Share + a B t a H t a S t a P i t 2 * + 3 * + 4 * + 5 *, 1 LT + a 9 BG + a 10 PL + a 11 RO + a 12 SK + u i, t t + a 6 CZ + a 7 LV (4) 3 RESULTS AND DISCUSSION 3.1 Converging trade patterns Analysing the agri-food trade of NMS as a whole, the regression results presented in Table 1 imply that the countries, in the period , were heading to a similar composition of their agri-food trade with respect to the stage of its processing. Growing similarity in trade composition has been observed for majority of analysed trade groupings.

6 6 Contributed Paper presented at IAMO Forum 2008 Over the analysed period, there has been a tendency towards narrowing the variability of composition of NMS agri-food trade. It means that the overall differences among individual NMS referring to the composition of agri-food trade with the examined trade groupings have been shrinking. The trend observed for exports has not, however, been as significant as was the case with imports. While on the export site, the overall increase in the similarity of the processing structure was due to shrinking variability in shares of horticulture/produce, semi-processed and highlyprocessed products. Growing similarity in import composition was mostly driven by converging shares of highly-processed products. The most similar were NMS shares of highly processed commodities on agri-food export and import. In addition, shares of these articles on both the export and import site saw the highest speed of decreasing heterogeneity. One could expect the fastest drop in heterogeneity in case of the commodity groups that revealed greatest dissimilarity (bulk commodities and horticulture/produce). Since this was not the case, the achieved results may reflect the fact, that highly-processed products took the most important position in NMS trade. Predictably, negative signs of parameters related to NMS agri-food trade with the EU-15 and NMS04 imply that in the period of observation there was an increasing similarity of composition of agri-food trade of these countries. The EU-15 and NMS04 have been the most important trading partners of the NMS. A possible explanation of the convergence in the export composition of NMS is a gradual harmonisation of agricultural and trade policies across NMS due to their integration process to EU and in the case of high-value products (semi-processed a processed) also modernisation of domestic production capacities as a result of an increasing inflow of foreign direct investments and the need to meet strict sanitary and phytosanitary standards on EU markets. The gradual stabilisation of import share of highly-processed products across the countries concerned could be explained by the gradual liberalisation of agri-food trade between NMS and the EU-15 on the one hand and among NMS on the other hand.

7 Development of Agri-food Trade Composition of the New EU Member States 7 Table 1: Development of composition of NMS agri-food trade Variable Export Import t ** (0.016) (0.017) H *** (0.079) (0.080) S *** (0.079) (0.080) P *** *** (0.079) (0.080) EU *** *** (0.096) (0.098) NMS *** (0.096) (0.098) NMS *** (0.096) (0.098) CIS *** 0.470*** (0.096) (0.098) ROW *** ** (0.096) (0.098) c 0.547*** *** (0.101) (0.103) N R 2 adj DW Breusch-Pagan / Cook-Weisberg test for heteroskedasticity chi2(1) = Prob > chi2 = Note: Standard errors in parentheses; DW - Durbin-Watson statistic; H 0 hypothesis for heteroskedasticity test: residuals are homoskedastic. ***/** - significant at 1% / 5% Source: own calculations 3.2 Shifts in the level of processing chi2(1) = Prob > chi2 = There was significant inertia in the structure of NMS agri-food trade, meaning that in the period the composition of agri-food trade with respect to the level of processing saw only a slow change (Table 2). This holds true for NMS trade with both the EU-15 and NMS04. In other words, a high share in one year was likely to result also in a relatively high

8 8 Contributed Paper presented at IAMO Forum 2008 share in the next year. It is documented by parameters corresponding to a one-year lag, whose values are at least 0.7. In the case of NMS agri-food exports to the EU-15, the presented results indicate no significant shift in their composition over the period. It means that during the whole period, NMS exports to the EU-15 markets were dominated by semi-processed and processed commodities, as these were the most important one. Highest value NMS agri-food exports to NMS04 markets have been growing over time at the expense of bulk commodities. Negative signs associated with horticulture/produce and semiprocessed products also point to a decrease in their share on total agri-food exports to NMS04, but these effects were not significant. The gradual rearrangement of composition of agri-food exports to NMS04 suggests that NMS were able to improve their positions in trade with the highest value-added products. A comparison with the exports to the EU-15 reveals that it was easier for NMS to increase the export share of highest-value commodities to the intra-nms space than to the EU-15. Given that processed commodities took largest share of NMS agri-food exports to the EU-15 and NMS04, the reason why the respective share with NMS04 was increasing while the one with the EU-15 was rather stable can be softer sanitary and phytosanitary measures applicable at the time by NMS, quality of exported products and consumer preferences in the target markets. Unlike agri-food exports, NMS agri-food imports from the EU-15 saw a gradual decrease in the share of bulk commodities accompanied by an increase in processed products. The development of composition of NMS agri-food imports from NMS04 parallels that of the EU- 15. Here, in addition, we observe a decrease in the share of imported horticulture/produce. A growing share of NMS highly-processed imports from the EU-15 implies that EU-15 producers and/or exporters were successful in exporting their processed products on NMS markets. NMS imports of processed products from NMS04 were growing even at a faster rate. This can be interpreted as NMS04 highly-processed products being more preferable in NMS to the ones from the EU-15. However, confirmation or rejection of this hypothesis is beyond the scope of this paper and it leaves room for further research. Nevertheless, likely lower NMS04 producer prices and a possibly higher tariff cut during the observed period in the intra-nms space compared to the cut between NMS and the EU-15 can explain the situation.

9 Development of Agri-food Trade Composition of the New EU Member States 9 Table 2: Regression results - shifts in the level of processing Export Import NMS04 EU-15 NMS04 EU-15 Share(-1) *** *** *** *** (0.114) (0.043) (0.057) (0.058) B*t ** *** *** (0.014) (0.017) (0.012) (0.012) H*t ** (0.015) (0.015) (0.013) (0.007) S*t (0.018) (0.014) (0.013) (0.008) P*t * *** *** (0.039) (0.016) (0.016) (0.010) CZ (0.032) (0.017) (0.016) (0.008) LV (0.032) (0.022) (0.015) (0.006) LT (0.031) (0.027) (0.016) (0.012) BG (0.032) (0.020) (0.023) (0.013) PL (0.029) (0.015) (0.017) (0.008) RO (0.038) (0.014) (0.025) (0.018) SK (0.033) (0.017) (0.018) (0.008) Constant ** *** *** (0.043) (0.036) (0.038) R 2 -adj F-statistic *** *** *** *** Note: ***/**/* - significant at 1% / 5% /10% Source: own calculations To summarise, the situation of decreasing shares of bulk commodities in trade of NMS and at the same time increasing importance of highly processed food products is in line global tendencies. Economic growth in NMS during recent years, proxied by growing per capita income, is one of the determinants of changing patterns of NMS agri-food composition.

10 10 Contributed Paper presented at IAMO Forum CONCLUSION The paper analyses the development of composition of agri-food trade of new EU Member States of the 2004 and 2007 enlargements. The analysis focuses on the level of processing of the traded commodities. In the second part of the paper, we examine, on the example of the two most important trade partners of NMS, what shifts in the processing level of traded commodities occurred during the pre- and post-accession period. The main finding of the paper is that there has been a tendency across NMS towards decreasing heterogeneity of export and import shares of commodity groups according to their processing level. Moreover, the trade share of highly-processed commodities saw the fastest rate of convergence during the period. This may imply that the EU accession process, by means of various factors (e.g. harmonisation of agricultural and trade policies, gradual trade liberalisation) had an effect on the trade patterns of the newcomers. Different sanitary and phytosanitary standards applied by the EU-15 and NMS before 2004 could lead to the fact that NMS processed agri-food export have been more competitive on NMS04 markets than in the EU-15. The higher NMS competitiveness on NMS04 markets is suggested by a higher export share of those products in trade with NMS04 than the EU-15. The structure of agri-food trade of NMS in terms of processing level does not exhibit much dynamism over the period, though some shifts are observable. During the whole period , NMS agri-food exports to the EU-15 did not see any significant shift in the processing level. Agri-food trade of NMS with the EU-15 before 2004 was liberalised to a greater extent than it was among the members of the Central European Free Trade Agreement (CEFTA). Double profit agreement between the EU and individual NMS, adopted before their EU accession, contributed to the stabilisation of NMS composition of agri-food exports to the EU-15. Among individual NMS the bilateral protection measures were applied to the most sensitive commodities. The composition of NMS agri-food exports to NMS04 was influenced only in 2004, when the last bilateral tariff and non-tariff measures were abolished. This can explain the improvement of NMS trade positions in highest value-added products on NMS04 markets unlike on the EU-15 markets.

11 Development of Agri-food Trade Composition of the New EU Member States 11 ACKNOWLEDGEMENTS The authors gratefully acknowledge financial support provided by the EU 6 th Framework Programme TRADEAG Agricultural Trade Agreements (Specific Targeted Research Project, contract No ) and the Slovak Ministry of Education. REFERENCES BANSE, M., GAY, S., H., MCDONALD, S., M BAREK, R., SWINNEN, J. (2007). Competitiveness in the Food Industry: a CGE Modelling Approach to Assess Foreign Direct Investment in Transition Countries. A contributed paper prepared for presentation at a joint IAAE- EAAE seminar Agricultural Economics and Transition: What was expected, what we observed, the lessons learned, Budapest, Hungary, 6-8 September CAETANO, J., GALEGO, A. (2006). Trade flows among CEEC and EU countries: what are the future perspectives?, Revista de Economia Mundial, 8(15), CHEVASSUS-LOZZA E., UNGURU M. (2001). The EU enlargement to the CEEC: impacts on agrifood trade with third countries. A paper presented at 75th Conference on Policy Modelling for European and Global Issues, Brussels, Belgium, 5-7 July DE BENEDICTIS, L., TAJOLI, L. (2008). Similarity in trade structures, integration and catchingup, Economics of Transition, 16 (2), DRABIK, D. BARTOVA, L. (2007): Assessing the Implications of EU Enlargement for CEEC Agri-food Trade Specialisation. A contributed paper prepared for presentation at a joint IAAE- EAAE seminar Agricultural Economics and Transition: What was expected, what we observed, the lessons learned, Budapest, Hungary, 6-8 September GOW, H., SWINNEN, J. (1998). Agribusiness restructuring, foreign direct investment and holdup problems in agricultural transition, European Review of Agricultural Economics, 25(4), GULATI, A., MINOT, N., DELGADO, C., BORA, B. (2007). Growth in high-value agriculture in Asia and the emergence of vertical links with farmers. in: SWINNEN, J. (ed.): Global Supply Chains, Standards and the Poor: How the Globalization of Food Systems and Standards Affects Rural Development and Poverty. CABI.

12 12 Contributed Paper presented at IAMO Forum 2008 VAN BERKUM, S. (1999). Patterns of intra-industry trade and foreign direct investment in agro-food products: Implications for East-West integration, MOCT/MOST, Economic Policy in Transition Economies, 9(3), ZAGHINI, A. (2005). Evolution of trade patterns in the new EU member States, Economics of Transition, 13(4),